Legislature(2005 - 2006)SENATE FINANCE 532

04/04/2006 09:00 AM Senate FINANCE


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09:07:13 AM Start
09:07:29 AM SB305
11:25:15 AM Adjourn
* first hearing in first committee of referral
+ teleconferenced
= bill was previously heard/scheduled
+= SB 305 OIL AND GAS PRODUCTION TAX TELECONFERENCED
Heard & Held
+ Bills Previously Heard/Scheduled TELECONFERENCED
                            MINUTES                                                                                           
                    SENATE FINANCE COMMITTEE                                                                                  
                         April 4, 2006                                                                                        
                           9:07 a.m.                                                                                          
                                                                                                                                
                                                                                                                              
CALL TO ORDER                                                                                                               
                                                                                                                                
Co-Chair  Lyda  Green  convened   the  meeting  at  approximately                                                               
9:07:13 AM.                                                                                                                   
                                                                                                                                
PRESENT                                                                                                                     
                                                                                                                                
Senator Lyda Green, Co-Chair                                                                                                    
Senator Gary Wilken, Co-Chair                                                                                                   
Senator Con Bunde, Vice-Chair                                                                                                   
Senator Fred Dyson                                                                                                              
Senator Lyman Hoffman                                                                                                           
Senator Donny Olson                                                                                                             
Senator Bert Stedman                                                                                                            
                                                                                                                                
Also Attending: SENATOR GARY STEVENS;  SENATOR TOM WAGONER; STEVE                                                             
MARSHALL, President  BP Exploration  Alaska, Inc.;  AGNUS WALKER,                                                               
Commercial  Vice  President,  BP Exploration  Alaska,  Inc.;  TOM                                                               
WILLIAMS,  Senior  Tax  Counsel,  BP  Exploration  Alaska,  Inc.;                                                               
RICHARD   OWEN,   Production   Manager,  ExxonMobil,   and   Vice                                                               
President, ExxonMobil Alaska Production;                                                                                        
                                                                                                                                
Attending  via  Teleconference:   There  were  no  teleconference                                                             
participants.                                                                                                                   
                                                                                                                                
SUMMARY INFORMATION                                                                                                         
                                                                                                                                
SB 305-OIL AND GAS PRODUCTION TAX                                                                                               
                                                                                                                                
The Committee  heard from industry representatives.  The bill was                                                               
held in Committee.                                                                                                              
                                                                                                                                
9:07:29 AM                                                                                                                    
                                                                                                                                
                                                                                                                                
     CS FOR SENATE BILL NO. 305(RES)                                                                                            
     "An Act providing for a production tax on oil and gas;                                                                     
     repealing the oil and gas production (severance) tax;                                                                      
     relating to the calculation of  the gross value at the point                                                               
     of production of oil or gas  and to the determination of the                                                               
     value of oil  and gas for purposes of the  production tax on                                                               
     oil and gas;  providing for tax credits against  the tax for                                                               
     certain   expenditures   and   losses;   relating   to   the                                                               
     relationship of the  production tax on oil and  gas to other                                                               
     taxes, to  the dates those  tax payments and  surcharges are                                                               
     due,  to interest  on overpayments  of the  tax, and  to the                                                               
     treatment of  the tax  in a  producer's settlement  with the                                                               
     royalty owners; relating  to flared gas, and to  oil and gas                                                               
     used  in the  operation of  a  lease or  property under  the                                                               
     production tax; relating  to the prevailing value  of oil or                                                               
     gas  under the  production  tax; relating  to surcharges  on                                                               
     oil; relating  to statements  or other  information required                                                               
     to be filed with or  furnished to the Department of Revenue,                                                               
     to the penalty  for failure to file certain  reports for the                                                               
     tax, to the powers of the  Department of Revenue, and to the                                                               
     disclosure of  certain information required to  be furnished                                                               
     to  the   Department  of  Revenue   as  applicable   to  the                                                               
     administration of  the tax;  relating to  criminal penalties                                                               
     for  violating conditions  governing  access to  and use  of                                                               
     confidential  information relating  to the  tax, and  to the                                                               
     deposit  of  tax  money  collected   by  the  Department  of                                                               
     Revenue;  amending  the  definitions of  'gas,'  'oil,'  and                                                               
     certain other terms for purposes  of the production tax, and                                                               
     as the  definition of the  term 'gas' applies in  the Alaska                                                               
     Stranded   Gas   Development   Act,   and   adding   further                                                               
     definitions;  making  conforming amendments;  and  providing                                                               
     for an effective date."                                                                                                    
                                                                                                                                
                                                                                                                                
This was the fourth hearing for this bill in the Senate Finance                                                                 
Committee.                                                                                                                      
                                                                                                                                
9:07:41 AM                                                                                                                    
                                                                                                                                
Representatives  of BP  Exploration, Alaska  gave a  presentation                                                               
utilizing a handout  titled, "BP Presentation on  CSSB 305 (PPT),                                                               
Alaska  State Legislature,  Senate Finance  Committee, 4th  April                                                               
2006" [copy on file].                                                                                                           
                                                                                                                                
STEVE MARSHALL, President, BP Exploration Alaska, Inc.                                                                          
introduced his co-presenters and made the following statement.                                                                  
                                                                                                                                
     Over the  last few weeks  as we've been working  through the                                                               
     various committees, both  on the House and  Senate side, and                                                               
     being in Juneau  meeting with a number  of legislators, I've                                                               
     become increasingly concerned about  the direction the bills                                                               
     are taking.  Seems to be and  to BP that things  are heading                                                               
     in the wrong direction.                                                                                                    
                                                                                                                                
     There  is clearly  a  focus on  short-term  revenues to  the                                                               
     State. My  worry is that  is being  done at the  jeopardy of                                                               
     the longer-term  revenues. And to  some extent I  suppose we                                                               
     have not done  as good a job as we  could have in convincing                                                               
     those that  we've talked  to about  the linkage  between tax                                                               
     rate, investment and that investment linkage to production.                                                                
                                                                                                                                
     The  common ground  that the  industry and  the citizens  of                                                               
     Alaska  and the  legislature have  in common  is production.                                                               
     Our singular purpose, if you  boil it down to something very                                                               
     simple, is to maximize the recovery  of oil and gas from the                                                               
     oil fields in Alaska, and in our case, on the North Slope.                                                                 
                                                                                                                                
     The  natural decline  of  an oil  field or  a  gas field  is                                                               
     inevitable. It's  something in the  range of 15  percent for                                                               
     the  fields that  we have  on the  North Slope.  Through the                                                               
     efforts of our staffs and  teams and the investments and the                                                               
     ideas and the innovation and  the technology, we are able to                                                               
     arrest that decline to about six-percent.                                                                                  
                                                                                                                                
     For the industry that represents  about a billion and a half                                                               
     dollars  investment  per  year; capital  investment,  wells,                                                               
     flow lines, new  facilities, to be able to  not only produce                                                               
     oil and  gas but to also  handle the water, the  solids, the                                                               
     inevitable  challenges  that  come with  working  in  mature                                                               
     fields 20 to 30 years old.                                                                                                 
                                                                                                                                
     In addition  to that we spend  as an industry, in  excess of                                                               
     somewhere in the  range of $2 billion just  to operate those                                                               
     fields. So again the ongoing  maintenance, keeping the wells                                                               
     productive,  stimulating   the  wells  to  make   sure  they                                                               
     maximize  the production,  that  represents the  investment.                                                               
     About a billion  and a half capital, something  in the range                                                               
     of about $2 billion just to operate those fields.                                                                          
                                                                                                                                
     What I  think is happening  right now  is that all  of those                                                               
     efforts, because there  are no big projects,  they get lost.                                                               
     The wells that  we drill every year, the side  tracks of new                                                               
     wells, about  100 penetrations is  the hard peddling  we do.                                                               
     It's  a bit  like,  if  you think  the  industry  is like  a                                                               
     millpond, the  ducks just  sailing along  and the  oil keeps                                                               
     coming.  Actually we're  paddling very  hard underneath  the                                                               
     surface … to offset that decline.                                                                                          
                                                                                                                                
     I think  the decline is  somewhat masked by the  high prices                                                               
     we're  experiencing. That's  the good  news. It  benefits us                                                               
     all, clearly the industry, BP  is no exception, we're making                                                               
     very good  profits -  very good profits.  There is  no doubt                                                               
     about  that.   Resetting  the  balance  there   I  think  is                                                               
     something  that   is  clearly   the  challenge   before  us:                                                               
     achieving that balance.                                                                                                    
                                                                                                                                
     But the high  prices are I think offsetting  a very worrying                                                               
     trend. The industry's  track record, I wish I  could say was                                                               
     exemplary  in  meeting  its  forecasts,  not  only  our  own                                                               
     internal  forecasts,  but  also  the  DNR  forecasts.  We've                                                               
     experienced  over  the last  four  or  five years,  we  have                                                               
     missed those in a negative sense every year.                                                                               
                                                                                                                                
     Why  is  that?  I  think  it's from  a  number  of  reasons:                                                               
     drilling wells  that have taken  longer, projects  that have                                                               
     been  delayed maybe  for  technological  reasons, maybe  for                                                               
     other external  factors, operational upsets,  small discrete                                                               
     investments that may  take a little longer  to mature. Every                                                               
     year as  we submit our  business plan it includes  many many                                                               
     discrete  individual  investments.  The  $600  million  that                                                               
     we're  spending  this  year   probably  represents  maybe  a                                                               
     hundred  different projects.  All  of which  have their  own                                                               
     economics and  their own  relative attractiveness.  It's our                                                               
     job to  mature those to  the point where we're  confident we                                                               
     can  actually deliver  on  what  we say  we're  going to  do                                                               
     there.                                                                                                                     
                                                                                                                                
     Any   time  we   change  one   factor,  that   could  be   a                                                               
     technological  factor  or any  other  factor,  it makes  the                                                               
     relative   competitiveness   of   those   investments   less                                                               
     attractive. Clearly  tax is one  aspect of that. So  I think                                                               
     the delays  to projects,  all it  does is  further undermine                                                               
     the production. It accelerates the  decline and when we lose                                                               
     that momentum it's very difficult,  if not impossible to get                                                               
     back.                                                                                                                      
                                                                                                                                
     I  think  we've shown  as  individual  companies and  as  an                                                               
     industry,  once  we  lose  the   a  particular  project  for                                                               
     whatever reason it's delayed, we  have nothing there to kind                                                               
     of put in  its place. We'll get  that production eventually,                                                               
     but  it just  slides  further into  the  future. That's  the                                                               
     underlying decline that we're seeing exaggerated.                                                                          
                                                                                                                                
     Now  BPs plans  over the  next ten  years are  to spend  $14                                                               
     billion.  That was  the plan  that  we put  together in  the                                                               
     summer  of last  year. It  clearly represents  a significant                                                               
     investment in gas.  But that gas only  represents about half                                                               
     of that $14 billion. There's  another $7 billion tied to oil                                                               
     projects.  That represents  almost  a  doubling of  upstream                                                               
     investment  - the  investment on  the North  Slope and  what                                                               
     we've experienced in the last few years.                                                                                   
                                                                                                                                
     We spend quite  a considerable amount in the  last few years                                                               
     on what  we call our  midstream. One billion dollars  on new                                                               
     tankers,  the four  new  tankers that  are  coming into  the                                                               
     fleet [and]  the modernization of  the pump stations  on the                                                               
     pipeline, are just two examples  where we're modernizing our                                                               
     infrastructure. Modernizing our  infrastructure for the next                                                               
     30  years, but  at the  same time,  investing to  lower unit                                                               
     costs.                                                                                                                     
                                                                                                                                
     That's  one of  the  big challenges  that  Alaska faces:  an                                                               
     incredibly high fixed  cost of infrastructure to  get oil to                                                               
     market. Unlike many places, the  distance to market is a big                                                               
     handicap for  Alaska. The actual  cost of doing  business is                                                               
     high, but  it's not  extraordinarily high.  The cost  to get                                                               
     the product,  oil or gas,  is considerably higher  than just                                                               
     about anywhere else BP operates.  I suspect the same is true                                                               
     for anybody in the industry.                                                                                               
                                                                                                                                
     That two-times spend  that we're looking at there  is what I                                                               
     want to make  sure we're not putting in  jeopardy. The 20/20                                                               
     proposal that the governor proposed  a few weeks ago, I have                                                               
     to say was at the outer  edge of where BP had been thinking.                                                               
     Prior to that  time, we'd been talking about  12 1/2 percent                                                               
     as a production tax. So  20 percent represents a big change.                                                               
     And 20/20  - 20 percent tax  and 20 percent credit,  in 2006                                                               
     and with  oil prices  that we currently  have, and  with the                                                               
     capital  plans  that  we  currently  have  this  year,  $600                                                               
     million, it  represents about a  13 percent  production tax.                                                               
     If  you strip  it down,  the tax  and the  credit represents                                                               
     about a 13 percent tax - effective tax on production.                                                                      
                                                                                                                                
     Under   ELF  [economic   limit  factor],   under  the   same                                                               
     circumstances,  the  same  scenario,   that's  about  5  1/2                                                               
     percent. So it's essentially a doubling of that tax rate.                                                                  
                                                                                                                                
     The Senate  bill, as it currently  stands, represents almost                                                               
     a  three-fold  increase  in  production  tax  over  ELF.  So                                                               
     perhaps that's  one way  of explaining  our concern  about -                                                               
     less about the  revenues for the State, but  more about what                                                               
     impact that will have on future investment.                                                                                
                                                                                                                                
     That's our mission.  That's what the 1,700  direct and 5,000                                                               
     indirect  employees working  for  BP do  everyday is  paddle                                                               
     very hard to keep maximizing that production.                                                                              
                                                                                                                                
     Certainly our  thinking prior to the  governor's bill coming                                                               
     out  was  that an  approach  that  provided the  State  with                                                               
     considerable  upside at  high prices.  That we  accepted and                                                               
     recognized the State's need for  that [as] something that we                                                               
     supported [and]  providing some  protection at  the downside                                                               
     under low prices. Agnus will  show that certainly in the $20                                                               
     to $25  price range, our  business makes very  little profit                                                               
     if any.  We'll come to  that in  more detail because  I know                                                               
     that's  been  an issue  that's  had  quite  a bit  of  press                                                               
     recently  and I  think  is worth  an  examination of  what's                                                               
     really driving  the business  there. We  want to  provide as                                                               
     much transparency on that as we possibly can.                                                                              
                                                                                                                                
     Our approach  was to provide  the State with upside  at high                                                               
     prices, something  the State  has not  enjoyed and  needs to                                                               
     and  should  [and]  some protection  at  the  downside.  The                                                               
     middle ground is  where we thought the game needs  to be won                                                               
     or lost. Preserving to the  extent we can the investment and                                                               
     the investment  climate over that  mid-range of  prices that                                                               
     we've been  operating under  for the last  two years  is the                                                               
     area where  we're most  concerned about.  So we  would argue                                                               
     for something less  than 20 percent in that  range. But that                                                               
     would  be  true progressivity.  What  it  boils down  to  is                                                               
     increasing  the size  of the  pie, not  just increasing  the                                                               
     slice of the pie that the State gets.                                                                                      
                                                                                                                                
     I think that  where we all win  is a bigger pie  that we can                                                               
     all share  in. I worry that  the focus so far  has been just                                                               
     on increasing the slice of the pie. That to me would be                                                                    
    less than [an] optimal outcome for the State of Alaska.                                                                     
                                                                                                                                
9:20:06 AM                                                                                                                    
                                                                                                                                
Senator Hoffman  referenced the witness' comment  that the Senate                                                               
Resources Committee  substitute provisions  for a 25  percent tax                                                               
and 20  percent credit would  result in  a tax increase  of three                                                               
times  that of  the current  rate. He  asked if  this calculation                                                               
includes the progressivity factor.                                                                                              
                                                                                                                                
9:20:23 AM                                                                                                                    
                                                                                                                                
Mr. Marshall responded that progressivity  is not included in the                                                               
assertion.                                                                                                                      
                                                                                                                                
9:20:27 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman  asked  the  percentage  of  the  increased  tax                                                               
including the progressivity.                                                                                                    
                                                                                                                                
9:20:33 AM                                                                                                                    
                                                                                                                                
AGNUS WALKER,  Commercial Vice President, BP  Exploration Alaska,                                                               
Inc.,  responded that  he  did  not have  figures,  but that  the                                                               
impact would be "obviously significantly more".                                                                                 
                                                                                                                                
9:20:45 AM                                                                                                                    
                                                                                                                                
Senator Dyson requested comments  pertaining to provisions of the                                                               
committee  substitute   that  would   be  "less   attractive"  in                                                               
encouraging  investment,  particularly  relating to  credits  and                                                               
transition provisions.                                                                                                          
                                                                                                                                
Senator  Dyson relayed  a "rule  of  thumb" that  five times  the                                                               
amount of credits  is equal to one percentage of  tax. He invited                                                               
the testifiers  to express their  agreement or  disagreement with                                                               
this theory. He asked also if  the rule would apply to oil prices                                                               
of both $60 per barrel and $25 per barrel.                                                                                      
                                                                                                                                
9:22:06 AM                                                                                                                    
                                                                                                                                
Mr. Marshall affirmed that the  tax rate would "always out trump"                                                               
credits. Credits assist in mitigating  tax. A formula providing a                                                               
20  percent   tax  and   a  20   percent  credit   calculates  to                                                               
approximately  13  percent  tax.  The tax  rate  is  "always  out                                                               
trumped" by  production. If  successful in  attracting additional                                                               
investment,  a  situation  could  result in  which  no  Petroleum                                                               
Production Tax (PPT) revenue would  be collected, but more income                                                               
would be generated for the State.                                                                                               
                                                                                                                                
9:23:49 AM                                                                                                                    
                                                                                                                                
Mr. Walker provided his  testimony referencing the aforementioned                                                               
handout  and  utilizing  a  visual  aid.  The  document  includes                                                               
information shown  on the  visual presentation  interspersed with                                                               
written testimony.                                                                                                              
                                                                                                                                
9:24:28 AM                                                                                                                    
                                                                                                                                
     Page 5                                                                                                                     
                                                                                                                                
     DOR Production Forecasts                                                                                                   
                                                                                                                                
          [Line graph depicting ANS Oil  Production (mbd) for the                                                               
          years  1978 through  2015. Actual  production is  shown                                                               
          for the  years 2005  and earlier;  projected production                                                               
          forecasts for  years following 2000 are  shown for Fall                                                               
          01, Fall 03, Fall 05 and Spring 06.]                                                                                  
                                                                                                                                
             · Historical basin decline has been around 6%                                                                      
             · Flattening of production from 2002-2004 due to                                                                   
               Alpine & Northstar                                                                                               
             · Decline since 2004 has mirrored historical basin                                                                 
               decline                                                                                                          
                                                                                                                                
Mr. Walker  noted the  decline in  production has  been occurring                                                               
since 1988.                                                                                                                     
                                                                                                                                
Mr. Walker pointed  out that the Department  of Revenue forecasts                                                               
have  been systematically  adjusted and  that previous  forecasts                                                               
were  too "optimistic"  and  forecasted  higher production  rates                                                               
than  was  actually  realized.  The  Spring  2006  forecast  also                                                               
predicts higher production than would actually occur.                                                                           
                                                                                                                                
Mr.  Walker  stressed that  this  should  be  of concern  to  all                                                               
parties.  Production  of  100,000  barrels  per  day  equates  to                                                               
$500,000 in revenues to the State of Alaska.                                                                                    
                                                                                                                                
9:27:15 AM                                                                                                                    
                                                                                                                                
Mr.  Walker  surmised  that certain  factors  were  proving  more                                                               
difficult than industry had  anticipated, thus causing production                                                               
rates  that  were "failing  to  meet"  forecasts. Development  of                                                               
viscous oil is  an example that some projects  are requiring more                                                               
time to  execute. Additionally, the  environment at  Northstar is                                                               
challenging. A significant investment  was made in another field,                                                               
which has provided no return.                                                                                                   
                                                                                                                                
9:28:16 AM                                                                                                                    
                                                                                                                                
Mr.  Walker reported  that  the forecasts  are  made utilizing  a                                                               
number of  "real projects"  with "real  reserves" located  on the                                                               
North Slope. However, the forecasts  are not based on a realistic                                                               
capital forecast. "No restraint"  is exercised in the preparation                                                               
of  these forecasts  to consider  whether industry  has available                                                               
capital, capacity, and support structure to undertake projects.                                                                 
                                                                                                                                
9:29:30 AM                                                                                                                    
                                                                                                                                
     Page 6                                                                                                                     
                                                                                                                                
     Investment Offsets Decline                                                                                                 
                                                                                                                                
     [Line graph  showing the  downward trend  from approximately                                                               
     1.75 Millions  of barrels  per day to  less than  .5 million                                                               
     for  years 1990  to almost  2050. Delineated  for the  years                                                               
     following 2005 are projections of  a 15% Decline rate of 1.3                                                               
     billions  of  barrels  produced  and  Zero  Investment;  the                                                               
     Status Quo with  a 6% Decline rate, 3.6  Billions of barrels                                                               
     to be  produced and an investment  of $1 - $1.5  billion per                                                               
     year; and a 3% Decline rate  with 7.5 Billions of barrels to                                                               
     be produced and an investment of $2 - $3 billion per year.]                                                                
                                                                                                                                
     DOR  Spring  Forecast  cannot  be  met  without  significant                                                               
     additional investment                                                                                                      
     The  vast  majority  of  that investment  must  be  made  in                                                               
     existing fields                                                                                                            
                                                                                                                                
Mr. Walker outlined  the history of decline in  production on the                                                               
North Slope.  If no additional investments  were made, production                                                               
from  existing  facilities   would  end  by  2012   or  2013.  In                                                               
actuality, investments are  currently made at $1  to $1.5 billion                                                               
per year.  A continuation of  this rate would continue  the trend                                                               
of a six-percent annual decline in production.                                                                                  
                                                                                                                                
Mr. Walker  stressed that BP  Exploration desires a  "healthy oil                                                               
business"  in Alaska  for decades  in the  future and  that would                                                               
enable the construction of a  natural gas pipeline. To accomplish                                                               
this, annual investment must be $2 to $3 billion per year.                                                                      
                                                                                                                                
Mr. Walker considered  the issue to be how to  double the current                                                               
level of investment.                                                                                                            
                                                                                                                                
9:32:42 AM                                                                                                                    
                                                                                                                                
Mr. Walker reiterated that the  Department of Revenue Spring 2006                                                               
forecast  would be  revised to  reflect a  lower production  rate                                                               
because  the  projected  rate  requires  a  significantly  higher                                                               
investment than currently being made.                                                                                           
                                                                                                                                
9:33:09 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman  asked  the  average   amounts  invested  by  BP                                                               
Exploration and the industry as a whole in the past five years.                                                                 
                                                                                                                                
9:33:23 AM                                                                                                                    
                                                                                                                                
Mr. Walker reported that the  industry has been investing between                                                               
$1 and $1.5 billion annually.  Of that amount, BP Exploration has                                                               
been investing  approximately $400 million annually  in "upstream                                                               
operations".  The  company  is   also  investing  in  "midstream"                                                               
activities.  The  total  investment  of BP  Exploration  is  $3.5                                                               
billion for the previous five years.                                                                                            
                                                                                                                                
9:34:13 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman asked  about the  company's stated  objective to                                                               
increase investment an additional  one billion dollars regardless                                                               
of proposed changes  to the tax structure. He asked  if this is a                                                               
result of higher oil prices.                                                                                                    
                                                                                                                                
9:34:43 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman   asked  the   underlying  reason   to  increase                                                               
investment  in future  years, given  that only  $400 million  was                                                               
invested annually in the past five years.                                                                                       
                                                                                                                                
9:35:06 AM                                                                                                                    
                                                                                                                                
Mr. Walker  clarified that the  investment figures quoted  on the                                                               
graph represent the total industry.                                                                                             
                                                                                                                                
9:35:43 AM                                                                                                                    
                                                                                                                                
Senator Olson asked  if the cited investment  amounts are limited                                                               
to investments  made in  North Slope  activities or  whether they                                                               
also include  investments in the transportation  process, such as                                                               
the pipeline and ships.                                                                                                         
                                                                                                                                
9:36:15 AM                                                                                                                    
                                                                                                                                
Mr. Walker replied the figures  represent the investment industry                                                               
has  made  in  North  Slope activities  only.  Industry  is  also                                                               
investing  in other  aspects  of  the business  to  ensure it  is                                                               
"healthy."                                                                                                                      
                                                                                                                                
9:36:34 AM                                                                                                                    
                                                                                                                                
Senator  Olson  asked  if  the  renovation  of  tanker  ships  is                                                               
included in these efforts. his                                                                                                  
                                                                                                                                
9:36:45 AM                                                                                                                    
                                                                                                                                
Mr.  Walker responded  that those  expensed are  not included  in                                                               
these figures. This data pertains only to upstream activities.                                                                  
                                                                                                                                
Mr. Walker repeated  that the future of  the resource development                                                               
would   be  determined   by   industry's   "ability  to   attract                                                               
investment."                                                                                                                    
                                                                                                                                
9:37:22 AM                                                                                                                    
                                                                                                                                
     Page 7                                                                                                                     
                                                                                                                                
     A 50 year vision                                                                                                           
                                                                                                                                
     [Graph delineating BP Net Production (mboe/d) of Light Oil,                                                                
     Viscous Oil, Heavy Oil, and Gas, for the years 1975 through                                                                
     2050.]                                                                                                                     
                                                                                                                                
Mr.  Walker spoke  to efforts  BP Exploration  is undertaking  to                                                               
address the  issue of  declining production.  The strategy  is to                                                               
create a  50-year future  for the business  by focusing  on known                                                               
resources. Accomplishing this would  be challenging but possible.                                                               
One challenge would be to  "normalize" the viscous and heavy oils                                                               
to transport  to market.  Production of  viscous oil  has started                                                               
and  efforts  have  started  for production  of  heavy  oil.  The                                                               
company also intents to take natural gas to market.                                                                             
                                                                                                                                
9:38:46 AM                                                                                                                    
                                                                                                                                
Mr. Walker contended that the  "future is very different from the                                                               
past". Future  activities would  involve three  businesses: light                                                               
and heavy oil, and gas. All  must be interdependent and each must                                                               
be "healthy" for the long term future of the North Slope.                                                                       
                                                                                                                                
9:39:13 AM                                                                                                                    
                                                                                                                                
Mr.  Walker  told  of  many  challenges  that  must  be  met  and                                                               
overcome.  These  efforts  are   underway.  Technology  is  being                                                               
identified  to increase  productivity  from  existing fields;  to                                                               
develop the  state's vast  viscous resource  and transport  it to                                                               
market from  the arctic  environment. The  company is  working to                                                               
ensure  its fleet  of  ship and  the  pipeline infrastructure  is                                                               
adequate for future use.                                                                                                        
                                                                                                                                
Mr. Walker  remarked that  BP Exploration  employs 200  people in                                                               
Alaska.                                                                                                                         
                                                                                                                                
9:40:33 AM                                                                                                                    
                                                                                                                                
Mr. Walker relayed the BP  Exploration plan to expend $14 billion                                                               
in the next  ten years. A significant portion  of that investment                                                               
would be  related to natural  gas development. The  investment in                                                               
oil resources in the North Slope would double.                                                                                  
                                                                                                                                
9:40:56 AM                                                                                                                    
                                                                                                                                
Mr.  Walker expressed  concern  that the  future  of these  plans                                                               
would be jeopardized by the proposed increased taxes.                                                                           
                                                                                                                                
9:41:09 AM                                                                                                                    
                                                                                                                                
     Page 8                                                                                                                     
                                                                                                                                
     Production Drives Revenue                                                                                                  
                                                                                                                                
     [Spreadsheet expounding on the information depicted on Page                                                                
     6 regarding the decline in production and industry                                                                         
     investment  amounts. Operating  Expenses are  listed at  $30                                                               
     billion for  1.3 billion barrels  produced; $50  billion for                                                               
     3.6  billion  barrels produced;  and  $100  billion for  7.5                                                               
     billion  barrels  produced.  Also  shown  is  State  Revenue                                                               
     (estimate)  Assuming 20/20  $40 ANS  of $10  billion from  a                                                               
     decline rate of 15% and  $1 billion Industry Investment; $30                                                               
     billion from a  decline rate of 6% and  $20 billion Industry                                                               
     Investment; and  $60 billion from  a decline rate of  3% and                                                               
     $60 billion  Industry Investment.  Pie charts for  the three                                                               
     scenarios demonstrate  the portion  of revenue  derived from                                                               
     the  proposed  PPT  compared  to  All  other  non-PPT  state                                                               
     revenue.]                                                                                                                  
                                                                                                                                
     Maximizing State Revenue means maximizing Production                                                                       
                                                                                                                                
Mr. Walker outlined the additional  information contained on this                                                               
page. Industry  would incur the  operating expenditures  "to keep                                                               
North Slope running for the duration."                                                                                          
                                                                                                                                
Mr. Walker pointed  out that if successful in  achieving a three-                                                               
percent  decline in  production  goal, a  $60 billion  investment                                                               
would  be  required.  This  amount  is  three-times  the  current                                                               
forecast. Additionally, $100 billion  in operating expenses would                                                               
be required; an amount twice the current forecast.                                                                              
                                                                                                                                
9:42:50 AM                                                                                                                    
                                                                                                                                
Mr. Walker  relayed that private  business interests  outside the                                                               
oil industry  caution against underestimating  the impact  of the                                                               
oil industry on the economy of Alaska.                                                                                          
                                                                                                                                
9:43:24 AM                                                                                                                    
                                                                                                                                
Mr.  Walker stressed  the  direct impact  of  oil development  on                                                               
State revenue. Property tax, royalty  and income tax revenues are                                                               
all based  on production.  Production through  a pipeline  is the                                                               
significant factor.                                                                                                             
                                                                                                                                
9:44:18 AM                                                                                                                    
                                                                                                                                
Mr.  Walker,  referencing the  pie  charts,  noted that  revenues                                                               
generated from  the proposed  PPT would  comprise less  than one-                                                               
quarter  of total  State oil  revenues. A  severance tax  of zero                                                               
could  be  adopted  if  determined  to  be  the  best  method  to                                                               
facilitate investment  in Alaska.  Such investment  could provide                                                               
the  State with  higher income  from property  taxes and  royalty                                                               
tax.                                                                                                                            
                                                                                                                                
9:45:09 AM                                                                                                                    
                                                                                                                                
Mr.  Walker  stated  that   the  current  six-percent  production                                                               
decline  is historically  driven  by the  current economic  limit                                                               
factor  (ELF)  tax  structure.  According to  the  basic  law  of                                                               
economics, less  investment would be  made if the  proposed 20/20                                                               
PPT structure  were adopted. This  would result in  an investment                                                               
decline of six to 15 percent.                                                                                                   
                                                                                                                                
9:45:53 AM                                                                                                                    
                                                                                                                                
Mr. Walker  contended that State officials  should be considering                                                               
methods  to  double the  current  rate  of investment  in  Alaska                                                               
rather than how much to increase taxes.                                                                                         
                                                                                                                                
9:46:12 AM                                                                                                                    
                                                                                                                                
Senator Hoffman returned  to Mr. Walker's earlier  comment that a                                                               
production  reduction of  100,000 barrels  of oil  would cause  a                                                               
revenue  reduction of  $500 million.  Senator  Hoffman asked  the                                                               
price of oil this calculation is based upon.                                                                                    
                                                                                                                                
9:46:29 AM                                                                                                                    
                                                                                                                                
Mr. Walker replied  the current price of $60 per  barrel was used                                                               
in this analogy.                                                                                                                
                                                                                                                                
9:46:35 AM                                                                                                                    
                                                                                                                                
Senator  Hoffman asked  if the  reverse  would be  true that  the                                                               
State  would  receive  $500  million   for  each  100,000  barrel                                                               
production increase.                                                                                                            
                                                                                                                                
9:47:26 AM                                                                                                                    
                                                                                                                                
Mr.  Walker responded  that  the factors  change  over time.  The                                                               
aforementioned  calculation is  based on  an economic  model over                                                               
the next 40 years. Although  production declines, operating costs                                                               
do not; therefore costs per barrel increases.                                                                                   
                                                                                                                                
9:48:16 AM                                                                                                                    
                                                                                                                                
     Page 9                                                                                                                     
                                                                                                                                
     US Marginal Tax Rates                                                                                                      
     North America: Tax Rate Comparison                                                                                         
     Alaska is already the highest cost region to operate                                                                       
                                                                                                                                
     [Bar graph listing the Marginal Tax Rate percentages of                                                                    
     other states and Canada as follows:                                                                                        
          Alb.1          39%                                                                                                    
          GOM            45%                                                                                                    
          CO             51%                                                                                                    
          WY             52%                                                                                                    
          KS             53%                                                                                                    
          TX             53%                                                                                                    
          NM             53%                                                                                                    
          OK             53%                                                                                                    
          CA             53%                                                                                                    
          Alb.2          54%                                                                                                    
          AK (ELF)       56%                                                                                                    
          LA             57%                                                                                                    
               (Alb: Alberta Heavy Oil - pre and post-payout)                                                                   
     Marginal Tax Rate percentages of PPT proposals are also                                                                    
     listed as follows:                                                                                                         
          20/20          61%                                                                                                    
          Senate:                                                                                                               
          <$40           63%                                                                                                    
          $100           67% Increases with oil price]                                                                          
                                                                                                                                
     Alaska will have the highest marginal tax rate                                                                             
                                                                                                                                
Mr. Walker answered his own question that the tax rate is                                                                       
important.                                                                                                                      
                                                                                                                                
Mr. Walker defined the marginal tax rate as applying to                                                                         
additional earnings after all costs are covered.                                                                                
                                                                                                                                
9:49:21 AM                                                                                                                    
                                                                                                                                
Mr. Walker noted the states listed are the top ten producers in                                                                 
the United States. Alaska currently has the second highest tax                                                                  
rate under the existing ELF system.                                                                                             
                                                                                                                                
9:49:53 AM                                                                                                                    
                                                                                                                                
Mr. Walker  pointed out  that the  original 20/20  proposal would                                                               
increase the marginal tax rate to  61 percent, which would be the                                                               
highest rate  in the United  States. The marginal tax  rate under                                                               
the Senate  Resources Committee substitute would  be higher still                                                               
and  the  progressivity  provision   would  allow  for  continued                                                               
increases for higher oil prices.                                                                                                
                                                                                                                                
9:50:39 AM                                                                                                                    
                                                                                                                                
Senator  Stedman  asked  the  marginal tax  rate  of  the  Senate                                                               
Resources Committee substitute at a  price of $100 per barrel not                                                               
including the progressivity factor.                                                                                             
                                                                                                                                
9:50:55 AM                                                                                                                    
                                                                                                                                
Mr. Walker  answered that the  marginal tax rate would  remain 63                                                               
percent and would not increase with price increases.                                                                            
                                                                                                                                
9:51:21 AM                                                                                                                    
                                                                                                                                
Senator Stedman  indicated he would have  additional questions at                                                               
a later time.                                                                                                                   
                                                                                                                                
9:51:28 AM                                                                                                                    
                                                                                                                                
Mr. Walker  declared it "unthinkable"  that high tax  rates would                                                               
yield additional investment.                                                                                                    
                                                                                                                                
9:51:45 AM                                                                                                                    
                                                                                                                                
Mr. Walker directed  attention to Alberta and the  Gulf of Mexico                                                               
where "business is booming" and  investment is attracted. Alberta                                                               
is "open  for business"  and imposes  a royalty  tax of  only one                                                               
percent.                                                                                                                        
                                                                                                                                
9:52:36 AM                                                                                                                    
                                                                                                                                
Senator  Bunde identified  the  need for  fiscal  certainty as  a                                                               
complication  to the  legislature in  determining specifics  of a                                                               
PPT structure.  A few  Alaskans would be  making a  decision that                                                               
would  remain unchanged  for many  years. He  asked about  fiscal                                                               
certainty  for the  citizens of  Alberta and  the amount  of time                                                               
before current decisions could be changed.                                                                                      
                                                                                                                                
9:53:26 AM                                                                                                                    
                                                                                                                                
Mr. Walker was unsure of the  exact terms of the tax structure in                                                               
Alberta, although he assumed the  government had some assurances.                                                               
Alaska  is  in the  unique  position  of  wanting a  $20  billion                                                               
natural gas  pipeline, which  is a "driving  need" for  long term                                                               
fiscal certainty.                                                                                                               
                                                                                                                                
9:54:04 AM                                                                                                                    
                                                                                                                                
Senator  Stedman agreed  that the  marginal tax  rate for  Alaska                                                               
would  be "huge",  but  reminded that  royalty  and property  tax                                                               
rates are  utilized as a  method of "selling our  resources". The                                                               
figures cited in this presentation  are similar to those reported                                                               
by the  Department of Revenue.  However, the  aggregate corporate                                                               
profit margin would  be 35.5 percent on prices of  $40 per barrel                                                               
under the  20/25 PPT proposal  contained in the  Senate Resources                                                               
Committee substitute  compared to 37.9 percent  under the current                                                               
ELF system. This difference in  profit is marginal. He recognized                                                               
that the  profit margin is  different for each company  and could                                                               
be lower for BP Exploration.                                                                                                    
                                                                                                                                
Senator  Stedman  acknowledged  that,  at  $60  per  barrel,  the                                                               
current  aggregate profit  margin is  approximately 42.8  percent                                                               
and would  be 32.7 under  the 20/25 method. However,  with prices                                                               
of $20  per barrel the profit  margins would be 18.5  percent and                                                               
23  percent  respectively.  The  profit  margins  would  actually                                                               
increase under the proposed system.                                                                                             
                                                                                                                                
Senator Stedman emphasized this  information should be considered                                                               
along with the issue of "top  down view of government take versus                                                               
industry  take and  where  is this  balance  point." The  balance                                                               
point would be determined through  the use of taxes and royalties                                                               
and would  be utilized as a  "selling point" of resources  in the                                                               
global market.  This differs from  the scenario of an  income tax                                                               
imposed by the federal government.                                                                                              
                                                                                                                                
9:57:03 AM                                                                                                                    
                                                                                                                                
Co-Chair Wilken  recalled that  the legislature  commissioned the                                                               
Wood McKenzie Group  a couple years prior to  provide an analysis                                                               
of the  investment climate of  oil and gas activities  in Alaska.                                                               
Mr. Walker  contended that  Alaska is one  of the  most expensive                                                               
places  to  produce and  transport  the  resources; however,  the                                                               
commissioned  report concluded  that Alaska  is also  one of  the                                                               
most profitable  locations. He asked  if the witness  agreed with                                                               
this finding.                                                                                                                   
                                                                                                                                
9:57:58 AM                                                                                                                    
                                                                                                                                
Mr. Walker responded that industry  must be profitable to invest.                                                               
The  real  issue is  whether  opportunities  exist in  Alaska  to                                                               
attract  industry capital.  These  opportunities, "obviously"  do                                                               
not exist due  to the annual six-percent  declining in production                                                               
on the North  Slope. The focus should be to  determine the proper                                                               
fiscal system  necessary to attract  investment, rather  than how                                                               
much the State could "take"  from oil companies. The issue should                                                               
be "what is right for Alaska."                                                                                                  
                                                                                                                                
9:59:15 AM                                                                                                                    
                                                                                                                                
Mr. Marshall gave his recollection  that the aforementioned study                                                               
made a  comparison of the  profitability of  individual projects.                                                               
Projects in Alaska  include high costs to  transport the resource                                                               
through the  pipeline and  on ships.  These are  unique expenses.                                                               
Production in Alaska is attractive  due to the profits that could                                                               
be realized at higher oil prices.                                                                                               
                                                                                                                                
Mr. Walker agreed with Senator  Stedman that achieving balance is                                                               
the goal.  However, providing  adequate product  to sell  is also                                                               
important.  He cautioned  against creating  a situation  in which                                                               
less product is sold.                                                                                                           
                                                                                                                                
10:01:36 AM                                                                                                                   
                                                                                                                                
Senator Dyson asked  if the marginal tax rate depicted  on Page 9                                                               
reflects all  government "take",  or just  those taxes  levied by                                                               
state governments.                                                                                                              
                                                                                                                                
10:01:53 AM                                                                                                                   
                                                                                                                                
Mr.  Walker  replied  this  includes  corporate  income  tax  and                                                               
royalty. The data also includes federal taxes.                                                                                  
                                                                                                                                
10:02:13 AM                                                                                                                   
                                                                                                                                
Senator Dyson  requested a listing  of the amount  of recoverable                                                               
oil  in  the  states  shown.  He  expected  this  information  is                                                               
factored into business decisions as well.                                                                                       
                                                                                                                                
10:02:39 AM                                                                                                                   
                                                                                                                                
Senator Dyson relayed that a  representative of a partner company                                                               
to BP Exploration operating on  the North Slope informed him that                                                               
the "present  lifting cost",  the cost of  producing a  barrel of                                                               
oil, from Prudhoe Bay is currently  between $13 and 14, and could                                                               
increase to $15  or $16 with the change of  the tax structure. He                                                               
asked if the witness agreed with this estimation.                                                                               
                                                                                                                                
10:03:09 AM                                                                                                                   
                                                                                                                                
Mr. Walker alluded  to difficulties in providing  a response. The                                                               
"break  even point"  for  BP Exploration  operations  is $22  per                                                               
barrel.  Operating  expenses  for  each  barrel  produced  equals                                                               
approximately  $10, capital  costs are  $6 per  barrel and  taxes                                                               
amount  to $7.  Profits  are achieved  after  those expenses  are                                                               
covered. Business is becoming more difficult and expensive.                                                                     
                                                                                                                                
10:04:56 AM                                                                                                                   
                                                                                                                                
Senator Dyson  took offense to  comments suggesting greed  is the                                                               
motivation for changing the current  tax structure. In actuality,                                                               
legislators are attempting to obtain  a "fair return" to Alaskans                                                               
for the  loss of a  "one-time" resource.  The issue is  not about                                                               
how much  money could  be collected to  spend on  government, but                                                               
rather what amount would be fair to the people of Alaska.                                                                       
                                                                                                                                
10:05:57 AM                                                                                                                   
                                                                                                                                
Mr.  Walker  responded  that  tax  rate is  only  one  factor  in                                                               
attracting  investment  in   Alaska.  Consultants  have  utilized                                                               
various figures  and comparisons. He expressed  concern that this                                                               
information  provides  an  "impression that's  the  answer".  The                                                               
quantity and  quality of  oil and  gas yet  to be  discovered and                                                               
developed  must  be  considered.  The country  of  Norway  has  a                                                               
significantly  high tax  rate  but has  experienced  20 years  of                                                               
continuous production  growth. The  reservoirs and wells  at that                                                               
location are  very productive. A similar  sized reservoir located                                                               
in  Western  Texas   or  Alaska  would  require   more  wells  to                                                               
"liberate" the oil  and gas, which involves  higher capital costs                                                               
and provides lower profitability.                                                                                               
                                                                                                                                
10:08:10 AM                                                                                                                   
                                                                                                                                
Senator  Bunde   addressed  the  underlying  principles   in  the                                                               
assumptions used in this process.  He asked if the witness agreed                                                               
that the  long-term oil price  would likely be  approximately $40                                                               
per barrel.                                                                                                                     
                                                                                                                                
10:09:56 AM                                                                                                                   
                                                                                                                                
Mr. Walker answered that BP  Exploration is "not in the business"                                                               
of forecasting  future prices. The  corporation takes  risks with                                                               
regard  to  future  oil  prices. The  "prevailing  view"  of  the                                                               
industry is that prices would decline from the current levels.                                                                  
                                                                                                                                
10:10:37 AM                                                                                                                   
                                                                                                                                
     Page 12                                                                                                                    
                                                                                                                                
     PPT Impacts                                                                                                                
     Government Take (%)                                                                                                        
                                                                                                                                
     [Pie Charts and spreadsheet depicting the distribution of                                                                  
     funds based on the price per barrel as follows:                                                                            
                                                                                                                                
          Price per barrel - $20                                                                                                
               State                                                                                                            
                    Status Quo     143%                                                                                         
                    PPT (20/20)    97%                                                                                          
               Federal                                                                                                          
                    Status Quo     1%                                                                                           
                    PPT            18%                                                                                          
               BP                                                                                                               
                    Status Quo     0%                                                                                           
                    PPT            0%                                                                                           
          Price per barrel - $40                                                                                                
               State                                                                                                            
                    Status Quo     40%                                                                                          
                    PPT (20/20)    44%                                                                                          
               Federal                                                                                                          
                    Status Quo     23%                                                                                          
                    PPT            22%                                                                                          
               BP                                                                                                               
                    Status Quo     37%                                                                                          
                    PPT            34%                                                                                          
          Price per barrel - $60                                                                                                
               State                                                                                                            
                    Status Quo     32%                                                                                          
                    PPT (20/20)    40%                                                                                          
               Federal                                                                                                          
                    Status Quo     25%                                                                                          
                    PPT            22%                                                                                          
               BP                                                                                                               
                    Status Quo     43%                                                                                          
                    PPT            38%                                                                                          
                                                                                                                                
Mr.  Walker  indicated  this  should  address  Senator  Stedman's                                                               
concern regarding  relative share. At  prices of $20  per barrel,                                                               
proceeds are insufficient under the  existing tax system to allow                                                               
BP  Exploration  to  earn  a profit.  The  "breakeven  point"  is                                                               
currently $22.50 per barrel.                                                                                                    
                                                                                                                                
Mr. Walker  surmised that the information  generated and utilized                                                               
by  the Department  of Revenue  as "corporate  profit" and  which                                                               
Senator Stedman  referenced is not  actually corporate  profit as                                                               
industry considers  it to be.  He is working with  the Department                                                               
of Revenue  to "clean up"  the information, which  is misleading.                                                               
BP  Exploration financial  information is  accurate, although  it                                                               
differs from the Department.                                                                                                    
                                                                                                                                
10:13:39 AM                                                                                                                   
                                                                                                                                
Senator  Stedman   appreciated  the  collaboration   between  the                                                               
company   and  the   Department   of   Revenue.  The   Department                                                               
information coincides within one  percent of the figures provided                                                               
by BP Exploration.                                                                                                              
                                                                                                                                
10:14:07 AM                                                                                                                   
                                                                                                                                
Mr.  Walker stated  some discrepancies  exist. The  Department of                                                               
Revenue calculates  industry earning  a reasonable profit  at oil                                                               
prices of $20 per barrel.                                                                                                       
                                                                                                                                
10:14:29 AM                                                                                                                   
                                                                                                                                
Senator  Stedman clarified  the comparable  figures are  based on                                                               
prices of  $40 and $60 per  barrel. He agreed the  discrepancy is                                                               
greater at $20 prices.                                                                                                          
                                                                                                                                
10:14:53 AM                                                                                                                   
                                                                                                                                
Mr. Walker remarked  that accurate information is  needed to base                                                               
decisions on.                                                                                                                   
                                                                                                                                
10:15:02 AM                                                                                                                   
                                                                                                                                
Senator  Bunde asked  if  the  status quo  indicated  on the  pie                                                               
charts pertains  to the current  tax structure, rather  than five                                                               
years in the future with the ELF system eliminated.                                                                             
                                                                                                                                
10:15:23 AM                                                                                                                   
                                                                                                                                
Mr. Walker  answered the  information is based  on 2006  data and                                                               
assumes an effective ELF tax rate of 5.5 percent.                                                                               
                                                                                                                                
10:15:40 AM                                                                                                                   
                                                                                                                                
Mr. Walker continued  detailing the pie charts. At  oil prices of                                                               
$40 per  barrel, the  State share  is still  greater than  the BP                                                               
Exploration share.  At $60 per  barrel, the BP  Exploration share                                                               
is greater than  the State's, as it should be  under a regressive                                                               
tax. A regressive tax provides  "relative assurance" to the State                                                               
during lower oil prices.                                                                                                        
                                                                                                                                
10:16:54 AM                                                                                                                   
                                                                                                                                
Mr. Walker pointed  out that the initial 20/20  PPT proposal does                                                               
not include progressivity.  At $20 price per  barrel, the federal                                                               
government  would receive  more  than under  the  ELF status  quo                                                               
system. BP Exploration would not earn a profit.                                                                                 
                                                                                                                                
10:17:27 AM                                                                                                                   
                                                                                                                                
Mr. Walker continued outlining the  shares received by the State,                                                               
federal government  and BP Exploration  at prices of $40  and $60                                                               
per barrel under the 20/20  proposal. In each instance, PPT would                                                               
provide the greatest share to the State.                                                                                        
                                                                                                                                
10:18:52 AM                                                                                                                   
                                                                                                                                
     CSSB 305: Key Issues                                                                                                       
                                                                                                                                
        · The increase of the base tax rate to 25% will be a                                                                    
          serious barrier to investment                                                                                         
        · The proposed progressivity in the tax rate combined                                                                   
          with the significant base rate increase in moving from                                                                
          WLF to PPT (25/20) is inappropriate given Alaska's                                                                    
          circumstances                                                                                                         
        · Several of  the newly  introduced terms  are unbalanced                                                               
          and will cause problems                                                                                               
        · Failure to  provide for the  full transition  will harm                                                               
          the State's reputation with investors                                                                                 
        · The  current  version  of  the  Bill  adds  significant                                                               
          complexity to one of the most complex fiscal regimes                                                                  
          in the world                                                                                                          
        · We do  not believe  this Bill  as drafted  achieves the                                                               
          mutual goal of increasing investment & stemming                                                                       
          decline                                                                                                               
        · Alaska  has  lots  of  oil  &  gas  but  production  is                                                               
          declining! Decline is our common enemy!                                                                               
        · Significant additional  investment is required  to stem                                                               
          decline                                                                                                               
        · Maximizing production will  maximize State revenues and                                                               
          benefits to Alaska                                                                                                    
        · With a  20% tax rate  Alaska will have the  highest tax                                                               
          rate & the highest cost structure in the US …… (25% is                                                                
          even worse!)                                                                                                          
        · The  bill  as drafted  will  not  maximize benefits  to                                                               
          Alaskans                                                                                                              
        · The   UK  and   Alberta  have   successfully  attracted                                                               
          significant investment and increased production by                                                                    
         reducing taxes and are thus great role models                                                                          
                                                                                                                                
Mr. Walker  overviewed this information  provided in  addition to                                                               
the presentation handout.                                                                                                       
                                                                                                                                
10:22:05 AM                                                                                                                   
                                                                                                                                
Senator Stedman  perceived an  indication that  industry predicts                                                               
implementation  of   the  "two   for  one"  provision   would  be                                                               
problematic.  The goal  is to  decrease the  declining production                                                               
rate at  Prudhoe Bay. He  asked a  "one and a  half to one"  or a                                                               
"two and  a half to  one" or  other variation would  provide more                                                               
enticement for  industry to increase  investment from  $1 billion                                                               
to $2 billion annually.                                                                                                         
                                                                                                                                
10:23:00 AM                                                                                                                   
                                                                                                                                
Co-Chair Green  asked if Senator Stedman's  comments pertained to                                                               
the tax rate or the PPT system.                                                                                                 
                                                                                                                                
10:23:06 AM                                                                                                                   
                                                                                                                                
Senator Stedman answered he was speaking to both issues.                                                                        
                                                                                                                                
10:23:08 AM                                                                                                                   
                                                                                                                                
Mr. Walker  responded that BP Exploration  was "still formulating                                                               
our views on  this". However a provision to  allow for transition                                                               
would  be  appropriate.  He  understood   the  logic  of  linking                                                               
transition benefits to future investment.  The provision could be                                                               
simplified in a manner in which the corporation could support.                                                                  
                                                                                                                                
10:24:04 AM                                                                                                                   
                                                                                                                                
Senator Stedman asked whether BP  Exploration intended to provide                                                               
an  example of  an acceptable  provision. He  requested input  on                                                               
this matter from both smaller and larger producers.                                                                             
                                                                                                                                
10:24:36 AM                                                                                                                   
                                                                                                                                
Senator  Bunde  expressed  interest in  further  considering  the                                                               
State's  reputation with  investors. He  understood the  witness'                                                               
testimony that if  a five-year transitional period,  such as that                                                               
contained  in the  original PPT  proposal, were  not adopted  the                                                               
reputation with investors would be harmed.                                                                                      
                                                                                                                                
10:25:20 AM                                                                                                                   
                                                                                                                                
Mr. Walker informed  that a "common base"  for investors includes                                                               
a transitional period.  The Governor's proposal was  not the only                                                               
acceptable  option,  but  some transitional  provisions  must  be                                                               
allowed for.                                                                                                                    
                                                                                                                                
10:25:53 AM                                                                                                                   
                                                                                                                                
Mr.  Marshall   announced  that  BP  Exploration   would  provide                                                               
detailed  comments  on  several   provisions  in  the  bill.  The                                                               
underlying issue  is the  relative economic  attractiveness today                                                               
compared to any  scenario. This is a key  differentiator. The tax                                                               
rate  is  a  significant  factor; however,  other  factors  could                                                               
ameliorate the impact of the tax structure change.                                                                              
                                                                                                                                
10:27:25 AM                                                                                                                   
                                                                                                                                
Senator Stedman understood  the different impact of  a 25 percent                                                               
tax rate.  Econ One, the  consultant retained by  the legislature                                                               
is calculating the impacts of  25 percent and 30 percent credits.                                                               
He requested input from BP  Exploration on this and an assessment                                                               
of how "helpful" increased credits would be.                                                                                    
                                                                                                                                
10:28:42 AM                                                                                                                   
                                                                                                                                
Mr. Walker  gave his  initial reaction  that higher  credits "are                                                               
good". The corporation's original  proposal to Governor Murkowski                                                               
included a  12.5 percent  tax rate  and a  25 percent  credit for                                                               
many  facilities. BP  Exploration supports  a credit  rate higher                                                               
than  the tax  rate. A  credit system  to "incentify"  investment                                                               
would be  beneficial to  Alaska; however,  the credit  rate could                                                               
not be  increased to an  amount to  fully compensate for  the tax                                                               
rate.                                                                                                                           
                                                                                                                                
10:29:53 AM                                                                                                                   
                                                                                                                                
Mr. Walker asserted that the  language of this legislation is too                                                               
complex for the  fiscal regime. He recommended  amending the bill                                                               
to provide greater simplicity.                                                                                                  
                                                                                                                                
10:30:23 AM                                                                                                                   
                                                                                                                                
Mr. Walker declared  that the provisions of  the Senate Resources                                                               
Committee  substitute  would  not  achieve  the  mutual  goal  of                                                               
increasing  investment.   The  State   and  industry   should  be                                                               
"entirely aligned"  in determining what  is in the  best interest                                                               
for Alaska.                                                                                                                     
                                                                                                                                
10:30:55 AM                                                                                                                   
                                                                                                                                
Mr. Walker  addressed the proposed retroactive  effective date of                                                               
the tax structure change. This  is not appropriate. The effective                                                               
date should be no sooner than July 1.                                                                                           
                                                                                                                                
10:31:29 AM                                                                                                                   
                                                                                                                                
Mr. Walker  concluded his  presentation by  saying that  a better                                                               
tax  system could  be  achieved  and offering  to  work with  the                                                               
legislature to accomplish this.                                                                                                 
                                                                                                                                
10:33:30 AM                                                                                                                   
                                                                                                                                
Senator  Stedman requested  further  discussion on  the issue  of                                                               
base allowance.  The current  proposal would  provide for  no tax                                                               
levied on production  of 5,000 barrels or less and  tax levied on                                                               
an expediential curve for production  rates up to 30,000 barrels.                                                               
He asked the opinion of BP Exploration on this provision.                                                                       
                                                                                                                                
10:34:31 AM                                                                                                                   
                                                                                                                                
Mr.  Walker  replied  that the  resulting  $73  million  tax-free                                                               
provision was not  considered for the benefit  of BP Exploration.                                                               
The focus should  be in establishing a regime  that would benefit                                                               
all producers.  A rate that  is appropriate for  this corporation                                                               
should  be appropriate  for all  producers.  The Senate  Resource                                                               
Committee  substitute  excludes  large producers  from  the  base                                                               
allowance benefit. A new tax  system should have a "level playing                                                               
field".                                                                                                                         
                                                                                                                                
10:35:48 AM                                                                                                                   
                                                                                                                                
Mr.  Marshall informed  that original  discussions on  this issue                                                               
were focused on providing a  geographical specific base allowance                                                               
applicable  to all  producers  operating on  the  North Slope.  A                                                               
different system could be adopted  for operations located in Cook                                                               
Inlet.                                                                                                                          
                                                                                                                                
10:36:25 AM                                                                                                                   
                                                                                                                                
Senator  Stedman   noted  the   proposed  95   percent  "true-up"                                                               
provision that  would require producers  to submit 95  percent of                                                               
the estimated tax  on a monthly basis. He  requested comment from                                                               
industry on this  issue as well as any other  "burdens" or issues                                                               
of concern.                                                                                                                     
                                                                                                                                
10:36:48 AM                                                                                                                   
                                                                                                                                
TOM WILLIAMS,  Senior Tax Counsel,  BP Exploration  Alaska, Inc.,                                                               
testified   that  he   was  previously   employed  as   Assistant                                                               
Commission of  the Department of Revenue.  The 95-percent true-up                                                               
provision   is  "extremely   unfair".  Federal   taxpayers  remit                                                               
quarterly payments of estimated tax with  a true up of the actual                                                               
tax due  March of the following  year. No penalty is  assessed on                                                               
underestimated taxes.                                                                                                           
                                                                                                                                
10:38:01 AM                                                                                                                   
                                                                                                                                
Mr. Williams  stated that the proposed  PPT structure "resembles"                                                               
an income tax.  The provisions of the  Senate Resources Committee                                                               
substitute would  require the  taxpayer to  predict the  tax with                                                               
95-percent accuracy,  based on  future oil  prices. Additionally,                                                               
costs, which would be accounted as deductions, would be unknown.                                                                
                                                                                                                                
Mr. Williams continued  that capital costs would  be accounted as                                                               
credits   and   would   reduce   the   tax   liability.   However                                                               
unanticipated  events  during  the  year,  such  as  a  delay  in                                                               
obtaining   equipment,   would   result  in   different   capital                                                               
expenditures than  planned. Lower  production rates  could result                                                               
in  lower operating  costs. Lower  operating  costs would  garner                                                               
lower  deductions. These  issues  and challenges  are similar  to                                                               
those encountered with federal corporate income tax returns.                                                                    
                                                                                                                                
Mr.  Williams detailed  the accommodations  provided for  federal                                                               
returns, including  a nine-month  period to  reevaluate estimated                                                               
taxes.   This   legislation,   in   comparison,   would   require                                                               
significant  accuracy  each  month.  The  true-up  should  be  90                                                               
percent  and cumulative  to the  end of  the calendar  year. This                                                               
method would  be "workable" and  would provide the  State regular                                                               
cash flow.                                                                                                                      
                                                                                                                                
10:43:28 AM                                                                                                                   
                                                                                                                                
Senator  Stedman surmised  the  corporation  prefers the  true-up                                                               
provision contained  in the original  PPT proposal to  the Senate                                                               
Resources Committee substitute.                                                                                                 
                                                                                                                                
10:43:37 AM                                                                                                                   
                                                                                                                                
Mr.  Williams corrected  that the  legislation introduced  at the                                                               
request  of  the governor  would  create  the same  difficulties.                                                               
Although  the true-up  is 90  percent, penalties  would still  be                                                               
assessed for underestimations.                                                                                                  
                                                                                                                                
10:44:03 AM                                                                                                                   
                                                                                                                                
Senator Stedman informed he would review this matter.                                                                           
                                                                                                                                
Senator Stedman asked the corporation's  position on the proposal                                                               
to increase  the oil  spill surcharge  fee rate  by one  cent and                                                               
implement other changes to the existing program.                                                                                
                                                                                                                                
10:44:25 AM                                                                                                                   
                                                                                                                                
Mr. Williams explained the  Senate Resources Committee substitute                                                               
proposes  to  lower  the  surcharge collected  for  the  Oil  and                                                               
Hazardous Substances  Spill Response (470) Fund  from the current                                                               
amount of two cents to one cent.  The balance of this fund is $50                                                               
million  and therefore  has "gone  to sleep",  and the  surcharge                                                               
would not be levied unless the balance was reduced.                                                                             
                                                                                                                                
Mr. Williams concluded  that a reduction in  the surcharge amount                                                               
would "move  away from where the  State would want to  be." In an                                                               
incident  in which  the fund  were  drawn against,  it should  be                                                               
replenished    expeditiously,    rather   than    remain    below                                                               
replenishment  for an  extended  period.  The proposed  reduction                                                               
would double the length of time before the fund was replenished.                                                                
                                                                                                                                
10:46:10 AM                                                                                                                   
                                                                                                                                
Senator Olson,  referencing the pie  charts on Page  12, realized                                                               
that  industry  profits and  the  State  benefits from  high  oil                                                               
prices.   However,  residents   of  the   election  district   he                                                               
represents  would be  impacted by  the high  price. He  requested                                                               
consideration of the greater context  of the issue. He also asked                                                               
the impact  of the proposed increase  from a 20 percent  tax to a                                                               
25 percent tax.                                                                                                                 
                                                                                                                                
10:48:06 AM                                                                                                                   
                                                                                                                                
Mr.  Walker  responded  that  a  25 percent  tax  would  place  a                                                               
"significant additional  burden on industry". Revised  pie charts                                                               
demonstrating the  impact of  a 25/20 PPT  would be  prepared and                                                               
provided.                                                                                                                       
                                                                                                                                
Senator  Olson surmised  that high  oil  prices are  in the  best                                                               
interest of industry.                                                                                                           
                                                                                                                                
Mr. Walker agreed  and furthered that high oil prices  are in the                                                               
best interest of all parties.                                                                                                   
                                                                                                                                
Senator  Olson countered  that high  prices are  not in  the best                                                               
interest of local consumers.                                                                                                    
                                                                                                                                
Mr. Walker advocated  for the State's decisions  in expending its                                                               
revenue generated from the high oil prices.                                                                                     
                                                                                                                                
10:49:26 AM                                                                                                                   
                                                                                                                                
Co-Chair Green announced that the Committee could develop a list                                                                
of questions for BP Exploration.                                                                                                
                                                                                                                                
10:49:52 AM                                                                                                                   
                                                                                                                                
Mr. Walker indicated he would be available to address these.                                                                    
                                                                                                                                
10:50:02 AM                                                                                                                   
                                                                                                                                
Co-Chair Green intended input "from all sides" of the proposed                                                                  
PPT issue.                                                                                                                      
                                                                                                                                
AT EASE 10:49:50 AM / 10:57:25 AM                                                                                           
                                                                                                                                
10:57:41 AM                                                                                                                   
                                                                                                                                
RICHARD OWEN, Production Manager, ExxonMobil, and Vice                                                                          
President, ExxonMobil Alaska Production, read testimony into the                                                                
record as follows.                                                                                                              
                                                                                                                                
     I am  here today to  discuss ExxonMobil's concerns  with the                                                               
     committee  substitute  to  SB  305. Before  I  go  into  our                                                               
     specific concerns,  I would  like to take  a few  minutes to                                                               
     describe  ExxonMobil's history  in Alaska,  how tax  systems                                                               
     impact  investments, and  our  assessment  of the  remaining                                                               
     resource potential on Alaska's North Slope.                                                                                
                                                                                                                                
     ExxonMobil  has had  a presence  in Alaska  for over  half a                                                               
     century,  investing  more than  11  billion  dollars in  the                                                               
     State's   economy.   Currently,   ExxonMobil   has   working                                                               
     interests  in Prudhoe  Bay, Kuparuk,  Endicott, and  Granite                                                               
     Point. We are  the operator of the Point  Thompson Unit, and                                                               
     we  are  the largest  interest  holder  in the  Prudhoe  Bay                                                               
     field.  Our  current  working  interest  oil  production  is                                                               
     approximately 180,000 B/D (Note:  EMWI 159,000 EMNI), and we                                                               
     are the  largest owner  of discovered  gas resource.  We are                                                               
     proud of the role our  company has played in Alaska through:                                                               
     exploration;  initial  field developments;  construction  of                                                               
     TAPS  [Trans-Alaska  Pipeline  System]; development  of  new                                                               
     technology;  and   the  promotion  of   efficient  reservoir                                                               
     management  practices.  Today,  our production  from  Alaska                                                               
     represents  approximately 4%  of ExxonMobil's  worldwide oil                                                               
     and gas production.                                                                                                        
                                                                                                                                
     Our  Alaska production  is primarily  from  Prudhoe Bay  and                                                               
     near-by  satellite fields.  Prudhoe  Bay,  along with  Point                                                               
     Thomson, has  significant remaining potential, but  it comes                                                               
     at a higher cost and risk.                                                                                                 
                                                                                                                                
     One of  ExxonMobil's objectives -  in both the  gas pipeline                                                               
     fiscal contract negotiation and  the discussion on oil taxes                                                               
     -  has  been  to  reduce the  risk  associated  with  fiscal                                                               
     changes by working  with the State of Alaska  to establish a                                                               
     predictable and durable fiscal environment  in which to make                                                               
     long  term  investment  decisions.  Changes  in  the  fiscal                                                               
     regime for  oil directly impacts how  Senator Elton evaluate                                                               
     ongoing  investment  decisions.  Tax   systems  need  to  be                                                               
     carefully  designed  to  ensure  the  desired  objective  of                                                               
     resource  development  is  achieved.  To  that  end,  it  is                                                               
     critical to take  into account the quality  of the remaining                                                               
     resource  otherwise  a  change   may  result  in  unintended                                                               
     consequences, such as reduced  investments and lower reserve                                                               
     recovery.                                                                                                                  
                                                                                                                                
     When I say quality of resource,  I mean: the size and nature                                                               
     of  the oil  and  gas reservoirs;  the  cost and  technology                                                               
     required  to  develop  those  reservoirs;  the  distance  to                                                               
     market; as well as the  tax and royalty system that applies,                                                               
     including the long-term stability  of that system. Countries                                                               
     experiencing significant  industry investment  have achieved                                                               
     the  proper balance  in their  fiscal regimes.  ExxonMobil's                                                               
     assessment  of the  remaining oil  resource suggests  future                                                               
     growth opportunities  will come  from: complex  enhanced oil                                                               
     recovery  (EOR)  projects;   development  of  smaller,  more                                                               
     marginal oil  accumulations; and the  innovative development                                                               
     of  viscous and  heavy  oil  resources. These  opportunities                                                               
     will  require   the  development  and  application   of  new                                                               
     technology, higher unit development  costs, and more complex                                                               
     operations  to  deliver  a   given  production  rate.  These                                                               
     resources are much  lower in quality as  compared to Prudhoe                                                               
     Bay  and Kuparuk,  though they  face the  similar challenges                                                               
     associated with arctic conditions and distance to market.                                                                  
                                                                                                                                
     Therefore,  we are  concerned the  Administration's original                                                               
     proposal  is  weighted towards  a  higher  tax, which  could                                                               
     prevent  some of  Alaska's challenged  resources from  being                                                               
     developed.  The committee  substitute  contains even  higher                                                               
     tax  rates,  which  may prevent  more  of  these  challenged                                                               
     resources from being developed.                                                                                            
                                                                                                                                
     On  February 28,  I testified  before  the Senate  Resources                                                               
     Committee about our  key concerns with SB  305 as originally                                                               
     proposed. On March  18, I testified again  before the Senate                                                               
     Resources   Committee  about   how   the  proposed   changes                                                               
     incorporated  in the  committee  substitute bill  exacerbate                                                               
     our concerns.  I do not intent  to cover all of  my previous                                                               
     testimony, but I  will provide comments on  these areas: the                                                               
     increase of the base tax  rate and addition of a progressive                                                               
     tax  rate component;  the committee  substitute's transition                                                               
     provisions;  and  the   elimination  of  royalty  settlement                                                               
     agreements as a determination of market value.                                                                             
                                                                                                                                
     SB   305,  as   originally  proposed,   would  represent   a                                                               
     significant  tax increase  on the  industry. And  as I  just                                                               
     outlined,  we  are  concerned  the  higher  tax  rate  could                                                               
     prevent  some  of  Alaska's remaining  challenged  resources                                                               
     from   being  developed.   The  committee   substitute  bill                                                               
     increases the  already high  cost base tax  rate to  25% and                                                               
     then further increases it as oil prices increase.                                                                          
                                                                                                                                
     Higher  tax  rates  discourage investment.    Companies  are                                                               
     willing to accept the risks  of long-term, capital intensive                                                               
     investments when  there is  a corresponding  opportunity for                                                               
     upside  potential  through a  variety  of  factors, such  as                                                               
     increased  production or  higher prices.  When you  limit or                                                               
     reduce  the benefit  companies can  achieve from  the upside                                                               
     factors, you  reduce the attractiveness of  those investment                                                               
     opportunities.  The proposal  to increase  the already  high                                                               
     base tax  rate and  then further increase  it as  oil prices                                                               
     increase,  reduces or  limits  the  upside potential,  which                                                               
     will   result   in    companies   recalibrating   investment                                                               
     decisions.  Reduced   investment  will  result   in  reduced                                                               
     resource  recovery,  diminished  state revenues,  and  fewer                                                               
     employment opportunities,  with a resultant  negative impact                                                               
     on  the  state's economy.  Again,  let  me reemphasize  this                                                               
     point. While  higher taxes may bring  in additional revenues                                                               
     in  the   short-term,  any   reduction  in   investment  and                                                               
     subsequent  production   will  significantly   impact  those                                                               
     revenues in the  longer term. We think the focus  of the tax                                                               
     bill   should   be   encouraging  investment   and   growing                                                               
     production, which  is not accomplished  with the  higher tax                                                               
     rate and increasing the tax rate with oil price.                                                                           
                                                                                                                                
     I  would  now like  to  discuss  the committee  substitute's                                                               
     transition provisions.  The benefits from a  typical oil and                                                               
     gas  investment take  many years  to be  realized. Satellite                                                               
     and tertiary  recovery investment  decisions by  our company                                                               
     during  the  last  five  years   were  made  under  the  ELF                                                               
     structure,  anticipating  a  lower   tax  relative  to  that                                                               
     proposed  under  the  PPT   bill.  The  State  appropriately                                                               
     provided  this  incentive  so these  challenged  and  costly                                                               
     projects   could  be   commercially  viable.   SB  305,   as                                                               
     originally  proposed, recognized  it is  not appropriate  to                                                               
     suddenly increase  taxes on these prior  investments without                                                               
     providing some  form of consideration. The  Senate Resources                                                               
     Committee  included transition  provisions in  the committee                                                               
     substitute bill,  but proposed  a deduction based  on recent                                                               
     investments  with  the  pace of  the  deductions  linked  to                                                               
     future spending. As I stated,  the purpose of the transition                                                               
     is  to  address  the  sudden increase  in  taxes  on  recent                                                               
     historical  investments. Future  investments decisions  will                                                               
     be  made under  the  new  tax system  based  on the  balance                                                               
     between  the new  tax rate  and  the credit  rate. For  this                                                               
     reason, we think the  Administration's proposal of providing                                                               
     a  deduction  based on  recent  investments,  not linked  to                                                               
     future spending, is more appropriate.                                                                                      
                                                                                                                                
     Finally,  I would  like to  express our  disappointment that                                                               
     the  provision  allowing the  use  of  a producer's  royalty                                                               
     settlement agreement to  determine the value of  oil and gas                                                               
     has been  removed from the  committee substitute  bill. That                                                               
     provision addressed  a longstanding  issue that  has divided                                                               
     the State  and the industry  over the years. Too  many years                                                               
     and too much  money have been spent in disputes  over how to                                                               
     value a single  barrel of crude oil or a  single molecule of                                                               
     gas. It  made little sense in  the past and it  makes little                                                               
     sense  today  for  the  State  to  have  separate  divisions                                                               
     determining the value  of oil and gas - one  for royalty and                                                               
     one for taxes. There is only  one value in the market place.                                                               
     SB 305, as  originally proposed, allowed the  State to value                                                               
     a  producer's  oil  and gas  using  the  producer's  royalty                                                               
     settlement  agreement,   which  was  negotiated   with,  and                                                               
     approved  by,  the  Department of  Natural  Resources.  That                                                               
     provision  was   important  to   industry  as   it  provided                                                               
     certainty to  a producer on  the value  on which to  pay its                                                               
     royalty   and   production    taxes   while   reducing   the                                                               
     administrative and  audit costs  to both  the State  and the                                                               
     industry.  We   urge  this   committee  to   reinstate  that                                                               
     provision.                                                                                                                 
                                                                                                                                
     In  summary,  the  quality  of   the  resources,  the  risks                                                               
     undertaken  by a  producer, and  the impact  on the  State's                                                               
     overall investment climate must  be factored into the design                                                               
     of the  tax system. While industry  needs predictability and                                                               
     durability under  which to  gauge investment  decisions, the                                                               
     attractiveness of  that predictably  and durability  is lost                                                               
     if it comes at too high a cost.                                                                                            
                                                                                                                                
     Despite  our  concerns with  the  original  SB 305,  we  are                                                               
     prepared  to move  forward under  that system  as originally                                                               
     proposed, since it  sought to provide a  balance of revenues                                                               
     to the  state and  producers across a  range of  oil prices,                                                               
     provided  sufficient incentive  for  producers to  undertake                                                               
     exploration and  development risks, and  included reasonable                                                               
     transition  provisions  for   past  investments.  And,  most                                                               
     importantly  for  ExxonMobil,   oil  fiscal  contract  terms                                                               
     consistent with the  Administration's proposal would provide                                                               
     the predictability  and durability necessary to  advance the                                                               
     gas  project to  the next  phase. Potential  changes to  the                                                               
     Administration's PPT bill should  be carefully considered to                                                               
     avoid upsetting the balance contained  in the bill - changes                                                               
     would  require  a  reexamination to  ensure  the  underlying                                                               
     health and stability  of the oil business  is sufficient for                                                               
     a gas pipeline project.                                                                                                    
                                                                                                                                
     As   I   mentioned,   the  proposed   committee   substitute                                                               
     exacerbates our  key concerns regarding  both tax  rates and                                                               
     certainty.  For these  reasons and  the need  to move  ahead                                                               
     with  the review  of the  Gas Pipeline  Fiscal Contract,  we                                                               
     urge  this  committee  to  support   SB  305  as  originally                                                               
     proposed.                                                                                                                  
                                                                                                                                
11:08:38 AM                                                                                                                   
                                                                                                                                
Senator  Stedman   referenced  the  witness'  testimony   to  the                                                               
potential impact  of a PPT  system on negotiations for  a natural                                                               
gas pipeline,  as well  as exploration  and development  over the                                                               
next five years. While he  recognized the potential impact on oil                                                               
development, he  questioned the  influence of  either a  20/25 or                                                               
20/30  PPT   system  or  the   status  quo  would  have   on  the                                                               
establishment of a natural gas pipeline.                                                                                        
                                                                                                                                
Senator  Stedman  cited  data  of   the  Department  of  Revenue,                                                               
calculating  that at  a price  of $40  per barrel,  profitability                                                               
would decline under  a PPT system. However, the  decline would be                                                               
relatively  minimal;  from  $3.8  billion to  $3.4  billion.  The                                                               
disparity increases with higher oil prices.                                                                                     
                                                                                                                                
Senator Stedman  contended that  Alaskan's, as  the owner  of the                                                               
resource, should  receive a fair  share of profits.  However, the                                                               
tax  system  should  also  ensure  that,  at  lower  oil  prices,                                                               
industry would be unable to produce and expand operations.                                                                      
                                                                                                                                
11:11:41 AM                                                                                                                   
                                                                                                                                
Senator  Hoffman qualified  that  the figures  listed by  Senator                                                               
Stedman do not include  progressivity. Progressivity would change                                                               
the amounts significantly.                                                                                                      
                                                                                                                                
11:12:05 AM                                                                                                                   
                                                                                                                                
Senator  Stedman  agreed that  progressivity  levied  on $60  per                                                               
barrel  prices would  impact  profits. At  below  $40 per  barrel                                                               
prices,  progressivity  would  not  be  triggered.    The  actual                                                               
impacts would be studied during this process.                                                                                   
                                                                                                                                
11:12:51 AM                                                                                                                   
                                                                                                                                
Mr.  Owen  expressed  concern  for   the  "health"  of  the  "oil                                                               
business"  in the  long term,  which  depends on  more than  just                                                               
profitability.                                                                                                                  
                                                                                                                                
11:13:38 AM                                                                                                                   
                                                                                                                                
Senator Bunde  identified the underlying  issue of the  long term                                                               
viability of  the oil industry is  based on the price  of oil. He                                                               
asked the Exxon Mobile prediction of the long term price of oil.                                                                
                                                                                                                                
11:14:05 AM                                                                                                                   
                                                                                                                                
Mr. Owen responded  that the company would not  share its outlook                                                               
on  prices. A  range of  prices is  utilized in  its forecasting.                                                               
Market conditions do support the current prices.                                                                                
                                                                                                                                
Senator  Dyson  ascertained  the witness'  implication  that  the                                                               
original  version  of the  bill,  introduced  at the  request  of                                                               
Governor Murkowski, could not be improved.                                                                                      
                                                                                                                                
11:15:05 AM                                                                                                                   
                                                                                                                                
Mr. Owen  responded that improvements  possibly could be  made to                                                               
the original version. ExxonMobil  has offered suggestions on some                                                               
aspects through the  Alaska Oil and Gas  Association. The company                                                               
has  had ample  time to  review the  Governor's proposal  and the                                                               
balance it  would create between producers,  explorers, large and                                                               
small parties,  etc. The  original bill  is acceptable  and would                                                               
provide the necessary predictability and stability.                                                                             
                                                                                                                                
11:15:48 AM                                                                                                                   
                                                                                                                                
Senator Dyson  asked if the  witness deemed the  original version                                                               
superior  to the  committee  substitutes  under consideration  in                                                               
this Committee and the House of Representatives.                                                                                
                                                                                                                                
11:16:05 AM                                                                                                                   
                                                                                                                                
Mr. Owen affirmed.                                                                                                              
                                                                                                                                
11:16:10 AM                                                                                                                   
                                                                                                                                
Senator Dyson  asked how  the recommendations  of the  Alaska Oil                                                               
and Gas Association were presented to the Committee.                                                                            
                                                                                                                                
11:16:25 AM                                                                                                                   
                                                                                                                                
Mr. Owen  replied that the Association  testified primarily about                                                               
the "mechanics" of the bill.                                                                                                    
                                                                                                                                
11:16:38 AM                                                                                                                   
                                                                                                                                
Co-Chair  Green informed  that the  Association testified  before                                                               
the Senate Resources Committee.                                                                                                 
                                                                                                                                
11:16:46 AM                                                                                                                   
                                                                                                                                
Senator Stedman  noted that the  issue of the  royalty settlement                                                               
agreements was  addressed significantly  in the  Senate Resources                                                               
Committee. He  requested the witness  explain why  ExxonMobil was                                                               
dissatisfied with the provisions  relating to this issue included                                                               
in  the  committee  substitute.   This  matter  could  be  easily                                                               
overlooked.                                                                                                                     
                                                                                                                                
11:17:48 AM                                                                                                                   
                                                                                                                                
Mr. Owen  paraphrased his earlier testimony,  explaining that the                                                               
royalty  settlement agreements  provide  "a very  clear and  well                                                               
defined"  process  to value  production.  This  process has  been                                                               
successful  and  has  agreement  by  the  Department  of  Natural                                                               
Resources. It  provides producers the ability  to calculate value                                                               
as well  as dispute  resolution through  a re-opener  process for                                                               
destination value and deductible costs.                                                                                         
                                                                                                                                
11:18:27 AM                                                                                                                   
                                                                                                                                
Senator Stedman  surmised the witness' assessment  that excluding                                                               
the  existing  royalty   settlement  agreement  provisions  would                                                               
result in a more cumbersome  process for industry that is subject                                                               
to disputes and litigation.                                                                                                     
                                                                                                                                
11:18:46 AM                                                                                                                   
                                                                                                                                
Mr.  Owen  affirmed  that  if  the  language  were  removed  from                                                               
statute,  royalty   provisions  would   have  to   be  completely                                                               
recreated. Industry  would prefer the ability  to value according                                                               
to the provisions of the royalty settlement agreement.                                                                          
                                                                                                                                
11:19:12 AM                                                                                                                   
                                                                                                                                
Senator  Stedman commented  that this  issue could  be worthy  of                                                               
discussion.                                                                                                                     
                                                                                                                                
11:19:31 AM                                                                                                                   
                                                                                                                                
Co-Chair  Green  asked the  witness  would  respond to  questions                                                               
compiled by the Committee.                                                                                                      
                                                                                                                                
11:19:50 AM                                                                                                                   
                                                                                                                                
Mr. Owen answered he would be available to do so.                                                                               
                                                                                                                                
11:19:53 AM                                                                                                                   
                                                                                                                                
Senator  Stedman referenced  the impact  of a  credit rate  of 20                                                               
percent, 25 percent  or 30 percent in relation to  the decline in                                                               
production.  He  asked  ExxonMobil's  position as  to  whether  a                                                               
higher  credit   percentage  would   assist  in   mitigating  the                                                               
situation.                                                                                                                      
                                                                                                                                
11:20:53 AM                                                                                                                   
                                                                                                                                
Mr. Owen  responded that  credits are  beneficial and  reduce the                                                               
"barrier  to investment"  in offsetting  some  upfront costs  for                                                               
investment.  However,  the  "total project"  is  also  important,                                                               
including "revenue stream".  If the overall tax rate  is too high                                                               
and "takes  so much of that  revenue stream" it would  impact the                                                               
"attractiveness" of those projects. A balance is necessary.                                                                     
                                                                                                                                
11:21:50 AM                                                                                                                   
                                                                                                                                
Senator  Stedman  spoke to  previous  testimony  as well  as  the                                                               
modeling complied by  Econ One and the  declining production from                                                               
the North Slope.  The Committee has been told  that regardless of                                                               
its actions  regarding tax rates  and credit rates,  Alaska could                                                               
never adequately  compete in "Exxon's world"  against competitors                                                               
worldwide that have "vastly" wider  pools of resources. Alaska is                                                               
at  a  competitive  disadvantage  due  to the  size  of  its  oil                                                               
reserves. He asked if the witness agreed with this assertion.                                                                   
                                                                                                                                
11:22:47 AM                                                                                                                   
                                                                                                                                
Mr. Owen  responded that  ExxonMobil is  "very active"  in Alaska                                                               
has  drilled extensively,  and supports  Prudhoe operations.  The                                                               
company is  pursuing "all  economic opportunities"  available and                                                               
would  continue to  invest in  the state  and toward  progress in                                                               
overcoming technical challenges. He  disagreed that Alaska is not                                                               
competitive,  but rather  stressed that  Alaska has  ExxonMobil's                                                               
investments and the company intends  to retain those investments.                                                               
The issue is whether the new tax structure would allow this.                                                                    
                                                                                                                                
11:24:49 AM                                                                                                                   
                                                                                                                                
Senator Dyson  distributed an article published  in The Economist                                                               
on the fiscal regime of the North Sea.                                                                                          
                                                                                                                                
ADJOURNMENT                                                                                                                 
                                                                                                                                
Co-Chair Lyda Green adjourned the meeting at 11:25:15 AM                                                                      

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